Delong Holdings

[kelvesy]

https://asia.nikkei.com/Markets/Equities...utput-cuts

Eagerly waiting for today's results, after-hours.

[kelvesy]

Delong (cyclical stock) released its 2Q results: http://infopub.sgx.com/FileOpen/2Qresult...eID=466033. Contrary to what most people believe in S-Chip, Delong has never raised money from shareholders since IPO. It was even an target to acquire by Russian billionaire, Roman Abramovich in the past.

Quick Analysis 
 
Sales up 25.8%, gross profit up 43.2%, net profit attributable up 33.5% (operational leverage at play). Finance costs went down by 54%.
 
For the first time, the company turned net cash as “cash and short term investments” is more than “total debt” 
 
1H FY0217 cash flow was boosted generating cash flow from ops of RMB$2.2b versus 1H 2016 of RMB$447m. The main reason for that is in the working capital where Delong delayed payables of RMB$813.4mil.
 
Notwithstanding the one-off such as impairments, Delong’s LTM ROE is 40.4%, Net Profit Margin 11.6% and Gross Profit Margin 16.7%
 
Latest NAV 29.88 RMB or 6.07 SGD
 
Against 110.2mil outstanding shares and last close of SGD $1.50, it has PE of 1.35 and P/B of 0.25. Comparing against its counterparts listed in SEHK or Shenzhen, its valuations is undemanding. It could because of the stock’s illiquidity. 
 
My belief is that as China cracks down on illegal steel mills, it reduces the supply of the steel and pushes up the prices of steel. It should be a good thing in the long term prospect. 
 
Steel prices for HRC (Delong’s main product) is up 30%+ 
 
http://www.sunsirs.com/uk/prodetail-195.html
 
http://www.businessinsider.com/iron-ore-...17-8/?IR=T
 
http://dlholdings.com/
 
Subsequent Events 
 
The PRC Government has also announced plans to reduce steelmaking capacity in Hebei Province by 31.86 million tonnes in 2017, and will accelerate production cuts in Hebei’s Langfang, Baoding and Zhangjiakou cities. The Company’s subsidiary, Laiyuan County Aoyu Steel Co., Ltd. (“Aoyu Steel”), is located in Baoding, one of the affected cities under the Capacity Reduction Plans. Based on the latest discussions between the Company and the relevant regulatory authorities in the PRC, Aoyu Steel will be required to cease steelmaking operations by 4Q2017, which will adversely impact the Group’s financial position
 
-- Aoyu Steel’s revenue contribution should be around 33% based on production volumes -
 
I expect profits to drop because of this. 
 
refer to factsheet: http://delong.listedcompany.com/misc/fac...uly_17.pdf
 
It sold off its Aoyu plant for RMB500mil. RMB100mil was collected earlier and the subsequent RMB400mil was collected on 27 July 2017. This will boost Delong’s cash to some extent in 3Q FY2017, together with another bumper quarter as steel prices shot to record highs.
 
http://infopub.sgx.com/FileOpen/Update%2...eID=464214

Read up its founder Ding Liguo

https://baike.baidu.com/item/%E4%B8%81%E...B%E5%9B%BD

https://www.google.com.sg/search?q=%E4%B...25&bih=591

Past

Billionaire Roman Abramovich wanted to acquire Delong in 2008 for $2.1bil previously. However, it failed because of Chinese anti-trust authorities blocked the deal. 

http://www.evraz.com/media/news/1810/
http://www.marketwatch.com/story/evraz-s...2008-02-19
http://www.reuters.com/article/us-evraz-...GU20090818

[yawnyawn]

Delong (cyclical stock) released its 2Q results: http://infopub.sgx.com/FileOpen/2Qresult...eID=466033. Contrary to what most people believe in S-Chip, Delong has never raised money from shareholders since IPO. It was even an target to acquire by Russian billionaire, Roman Abramovich in the past.

Quick Analysis 
 
Sales up 25.8%, gross profit up 43.2%, net profit attributable up 33.5% (operational leverage at play). Finance costs went down by 54%.
 
For the first time, the company turned net cash as “cash and short term investments” is more than “total debt” 
 
1H FY0217 cash flow was boosted generating cash flow from ops of RMB$2.2b versus 1H 2016 of RMB$447m. The main reason for that is in the working capital where Delong delayed payables of RMB$813.4mil.
 
Notwithstanding the one-off such as impairments, Delong’s LTM ROE is 40.4%, Net Profit Margin 11.6% and Gross Profit Margin 16.7%
 
Latest NAV 29.88 RMB or 6.07 SGD
 
Against 110.2mil outstanding shares and last close of SGD $1.50, it has PE of 1.35 and P/B of 0.25. Comparing against its counterparts listed in SEHK or Shenzhen, its valuations is undemanding. It could because of the stock’s illiquidity. 
 
My belief is that as China cracks down on illegal steel mills, it reduces the supply of the steel and pushes up the prices of steel. It should be a good thing in the long term prospect. 
 
Steel prices for HRC (Delong’s main product) is up 30%+ 
 
http://www.sunsirs.com/uk/prodetail-195.html
 
http://www.businessinsider.com/iron-ore-...17-8/?IR=T
 
http://dlholdings.com/
 
Subsequent Events 
 
The PRC Government has also announced plans to reduce steelmaking capacity in Hebei Province by 31.86 million tonnes in 2017, and will accelerate production cuts in Hebei’s Langfang, Baoding and Zhangjiakou cities. The Company’s subsidiary, Laiyuan County Aoyu Steel Co., Ltd. (“Aoyu Steel”), is located in Baoding, one of the affected cities under the Capacity Reduction Plans. Based on the latest discussions between the Company and the relevant regulatory authorities in the PRC, Aoyu Steel will be required to cease steelmaking operations by 4Q2017, which will adversely impact the Group’s financial position
 
-- Aoyu Steel’s revenue contribution should be around 33% based on production volumes -
 
I expect profits to drop because of this. 
 
refer to factsheet: http://delong.listedcompany.com/misc/fac...uly_17.pdf
 
It sold off its Aoyu plant for RMB500mil. RMB100mil was collected earlier and the subsequent RMB400mil was collected on 27 July 2017. This will boost Delong’s cash to some extent in 3Q FY2017, together with another bumper quarter as steel prices shot to record highs.
 
http://infopub.sgx.com/FileOpen/Update%2...eID=464214

Read up its founder Ding Liguo

https://baike.baidu.com/item/%E4%B8%81%E...B%E5%9B%BD

https://www.google.com.sg/search?q=%E4%B...25&bih=591

Past

Billionaire Roman Abramovich wanted to acquire Delong in 2008 for $2.1bil previously. However, it failed because of Chinese anti-trust authorities blocked the deal. 

http://www.evraz.com/media/news/1810/
http://www.marketwatch.com/story/evraz-s...2008-02-19
http://www.reuters.com/article/us-evraz-...GU20090818

With all you have said above, the most important dividend is still not in sight for shareholders despite outstanding numbers and company in net cash

[kelvesy]

With all you have said above, the most important dividend is still not in sight for shareholders despite outstanding numbers and company in net cash

Thanks yawnyawn, I am perplexed by it as well. Indeed, a sore point among S-Chips.

[weijian]

With all you have said above, the most important dividend is still not in sight for shareholders despite outstanding numbers and company in net cash

Thanks yawnyawn, I am perplexed by it as well. Indeed, a sore point among S-Chips.

Delong can only pay dividends based on retained earnings at holding company level. Based on Delong's AR16 pg57, retained earnings are -154mil RMB and so it will take some erasing before it goes positive to pay dividends. From the provided 2Q17 link, the company level's retained earnings is "still" at ~158mil RMB and so i guess unless the subsidiaries do some form of payment up (eg. shareholder loans etc) to the parent holding co, there will be "legally" no dividends.

AR16: http://delong.listedcompany.com/newsroom...KW3L.1.pdf

[portuser]

Delong can only pay dividends based on retained earnings at holding company level. Based on Delong's AR16 pg57, retained earnings are -154mil RMB and so it will take some erasing before it goes positive to pay dividends. From the provided 2Q17 link, the company level's retained earnings is "still" at ~158mil RMB and so i guess unless the subsidiaries do some form of payment up (eg. shareholder loans etc) to the parent holding co, there will be "legally" no dividends.

AR16: http://delong.listedcompany.com/newsroom...KW3L.1.pdf

AEM declared the following dividends when the company's retained earnings were still negative:

Period ended......Dividend rate......Retained earnings ($ m)
31 Dec 2015...........1 cent.................(22.7) 
31 Dec 2016...........1.3 cents............(20.7)
30 June 2017..........2.5 cents............(19.1)

Those dividend declarations would be improper if the following holds true:

"Delong can only pay dividends based on retained earnings at holding company level. Based on Delong's AR16 pg57, retained earnings are -154mil RMB and so it will take some erasing before it goes positive to pay dividends."

The Companies Act was last reviewed in 2007 by the Steering Committee for review of the Companies Act, chaired by Professor Walter Woon.

In recommending the retention of section 403, the Steering Committee said "The question is whether or not prior accumulated losses should be cleared before payment of dividends is allowed. There are reasons why this should not be required, viz, current shareholders should not be burdened with disadvantages arising from accumulated losses." 

This recommendation was subsequently accepted by the Ministry of Finance.

........................................................................................................................................................................................................

www.law.nccu.edu.tw/files/news/1131_342904d4.pdf:

page 3-28 & 3-29 

119    The Steering Committee considered the UK approach and also whether section 403 is clear enough in specifying that dividends may be distributed out of "profits". The issue is whether section 403 should be modified so that dividends are payable only out of accumulated realised gains minus accumulated realised losses rather than simply profits. The question is whether or not prior accumulated losses should be cleared before payment of dividends is allowed. There are reasons why this should not be required, viz, current shareholders should not be burdened with disadvantages arising from accumulated losses. Also, accumulated losses may be caused purely by accounting conventions rather than trading losses. This may be one reason not to require clearance of accumulated losses. In any case, moving to the UK model of allowing only ―realised profits to be distributable would not be an improvement because it would complicate the issue, particularly considering that Singapore would then probably have to adopt something similar to the voluminous guidance on what amounts to ―realised profits issued by the Institute of Chartered Accountants of England and Wales.

[specuvestor]

403 is the section on the Companies Act pertaining to Dividends and titled "Dividends payable from profits only":
http://statutes.agc.gov.sg/aol/search/di...%3DactsCur

The idea is the same but the interpretation for "profits" had been loosened, and might include unaudited quarterly profits (a trick I saw from Sino Grandness) , profits excluding past accumulated losses. Personally I think this is up to challenge by the courts if anyone rich and free enough (eg OHL) complained.

For reference, to continue on what Portuser posted:

120 During consultation, about half of the respondents supported no change in the current
position. The opposing school conveyed their objections to the current regime based on two
main grounds namely (i) ambiguity on the definition of ‗profits‘ and (ii) changes in
accounting rules. One other respondent also cited possible abuses on declaration of interim
dividend prior to year end impairment review.
121 On the definition of profits, the opposing school is of the opinion that while current
shareholders should not be burdened with disadvantages arising from accumulated losses, all
else being equal, the presence of accumulated losses would imply that there are insufficient
assets to satisfy the liabilities (disregarding other equity ―reserves‖ items which could
represent unrealized gains/losses from revaluation of assets). Hence, allowing distribution
when there are accumulated losses may be perceived to be prejudicial to the interests of
creditors. While accumulated losses may be caused purely by accounting conventions rather
than trading losses, it is the same issue with current year‘s profits. In other words, the issue of
whether accumulated losses should be taken into consideration remains contentious and the
respondent commented that the issue should be further studied.
122 On the changes in accounting rules, the current requirement in Section 403 of the
Companies Act does not adequately address accounting developments. For example, certain
profit/loss items are to be taken to equity/reserve, but there is no guidance as to whether such
equity items constitute distributable reserves. There should be further clarification on the
types of reserves that would be deemed to be distributable as dividends. The opposing school
also commented that the law should recognize that, with the development of the International
Financial Reporting Standards (IFRSs), the traditional notion of ―profits‖ may be inadequate
at times. For instance, under IFRS 9 Financial Instruments, which is slated to replace
International Accounting Standard 39 Financial Instruments: Recognition and Measurement
(from which the Singapore Financial Reporting Standard 39 has been adapted), a company
will face a situation whereby it will no longer have ―profits‖ or ―losses‖ arising from
derecognition of an investment designated under the Fair Value through Other
Comprehensive Income category, or ―losses‖ from impairment of investment designated
under such category.
123 The opposing school suggested that while adopting the ―realised profits‖ regime in the
UK may create more confusion, a middle-of-the-road approach as follows can be considered.
No dividend shall be payable to the shareholders of any company except:
(a) where the company has accumulated profits (after taking into account profits/ loss
for the period); or
(b) where the company is in an accumulated loss position, it would have to satisfy a
solvency test (that can be modelled after the New Zealand‘s approach).
It was contended that the above-proposed approach promotes more prudent business practice
than the current ―profit‖ test. In addition, the solvency test would address a situation where a
company does not have ―profits‖ to show but is nonetheless able to make distributions
without compromising its capital maintenance position (arising from changes in accounting
rules e.g. IFRS 9). Alternatively, some respondents suggested imposing the solvency test on
companies with negative equity to safeguard the interests of the creditors.
124 Taking into account all views submitted, the Steering Committee nevertheless
proposes no change to the present position. The NZ, Australian and UK models were studied
but not recommended for the reasons given above. As for the respondent‘s proposed middleof-the-road
approach, the Steering Committee acknowledges that there are some merits to
this. However as this approach contains some aspects of the UK, NZ and Australian regimes,
the Steering Committee recommends that the developments in other leading jurisdictions and
the impact of the recent changes in Australia be monitored for the time being, before this
issue is reconsidered.
125 Also, after considering the position in various jurisdictions, the Steering Committee
has decided that breach of section 403 should not be decriminalised. Although not a crime in
the UK or Hong Kong, making an unlawful distribution without satisfying the profits test is a
crime in Singapore19 and Australia20. In New Zealand, a similar crime is committed when an
unlawful distribution is made without satisfying the solvency test21. The Steering Committee
has also considered but decided that it is not necessary to amend section 403 to state that even
if there is a profit for the purposes of section 403, the directors‘ duties under section 157 of
the Companies Act still apply in respect of the directors‘ decision to distribute dividends.
126 The Steering Committee also considered the regulation of interim dividends.
Presently the common law position is that where interim dividends are paid, there must be a
reasonable expectation that there will be profits for the year to cover such interim dividends,
failing which the directors may be held personally liable. The Steering Committee considered
whether the Companies Act should provide that distribution of interim dividends based on the
most recent financial statements (not more than about 3 months old from the date of approval
of payment by directors) should be beyond reproach, no matter how the final year financial
statements may turn out. In addition, the financial statements based on which interim
dividends were paid would not have to be audited as long as they are prepared in accordance
with the Financial Reporting Standards (FRS) that are applicable to that financial period.
127 The consultation process elicited mixed views from the respondents. Some alternate
views were that financial results may be ―lumpy‖ and directors could very well be aware of
how the financial statements may turn out. Unlike final dividends, interim dividends are
wholly provisional and anticipate the profits to be disclosed in the final accounts. Hence,
requiring directors to reasonably believe that there will be profits for the year to cover such
interim dividends should be retained as a necessary safeguard. In conclusion, the Steering
Committee was persuaded to retain status quo. While one possible consequence was the loss
of business from fund companies which aspire to pay a regular quarterly dividend, there was
no basis to accord preferential treatment for such businesses.

[weijian]

Delong can only pay dividends based on retained earnings at holding company level. Based on Delong's AR16 pg57, retained earnings are -154mil RMB and so it will take some erasing before it goes positive to pay dividends. From the provided 2Q17 link, the company level's retained earnings is "still" at ~158mil RMB and so i guess unless the subsidiaries do some form of payment up (eg. shareholder loans etc) to the parent holding co, there will be "legally" no dividends.

AR16: http://delong.listedcompany.com/newsroom...KW3L.1.pdf

AEM declared the following dividends when the company's retained earnings were still negative:

Period ended......Dividend rate......Retained earnings ($ m)
31 Dec 2015...........1 cent.................(22.7) 
31 Dec 2016...........1.3 cents............(20.7)
30 June 2017..........2.5 cents............(19.1)

Those dividend declarations would be improper if the following holds true:

"Delong can only pay dividends based on retained earnings at holding company level. Based on Delong's AR16 pg57, retained earnings are -154mil RMB and so it will take some erasing before it goes positive to pay dividends."

hi portuser,
Thanks for your reply. I took a look at AEM AR16 (pg41) and the dividends are flowing out from the "group level" under retained earnings. Unfortunately, i can't find any equity changes for the "company level".
For example for China Sunsine in AR16, 33mil flowed out from "retained profits" under group level (pg 48) and the same amount is paid out from "retained profits" under the company level (pg 74) - So it is obvious that dividends are paid out from the holding company in Singapore (for China Sunsine case).

For AEM case, would it be actually a subsidiary paying out the dividend? (just making a guess). Wondering any VB (account trained) able to explain how AEM has a "workaround" on SG Company Act 403? If there are "workarounds", then Delong would be able to execute the "workaround" (if it is applicable in its case) to pay a dividend IF it wants to. 

AEM AR16: http://infopub.sgx.com/FileOpen/AEM%20AR...eID=446578
China Sunsine AR16: http://www.chinasunsine.com/en/wp-conten...Report.pdf

[specuvestor]

^^ Weijian, basically AEM made profit for FY15, FY16 and 1H17 which is why you can see their negative retained earnings decreasing. They used the annual non accumulated profit to pay out dividend. Like I said above, the market understanding is the definition of "profits" is loosened.

OPMI owns the listco. The subsidiaries can't pay direct to listco shareholders.

[ghchua]

No retained earnings to pay dividends? Do a capital reduction. S i2i did that. Global Testing did that. K1 Ventures did that. Fu Yu did that etc.

Ultimately, it really depends on whether the company wishes to pay out cash to shareholders. There are many ways to do it. No retained earnings should not be the reason for not giving out a dividend.